What is Escrow and How Does it Work?

Learn What an Escrow is and How it Works!

The term “escrow” often comes up in real estate transactions. But unless you’re familiar with the real estate world, you may wonder, “What is escrow?” The answer is simple: escrow is a legal arrangement where a third party holds property, or money, on behalf of two other parties that are in the process of completing a transaction. During a real estate transaction, the third party (or “escrow agent”) holds all documents and funds for both buyer and seller. That third-party member will protect a buyer’s money and cover all parties by ensuring they meet the purchase contract and mortgage agreement terms.

Knowing the definition of “escrow” is important, but it’s also essential to understand the basics. Keep reading to learn how escrows work and their benefits in buying and selling a home. Or, you can simply speak with a Real Estate Agent in Encinitas to learn more about escrows in real estate transactions.

How Does Escrow Work?

In a real estate transaction, both buyers and sellers will sign what is known as a “purchase agreement.” Once both parties complete the agreement, the buyer must make an earnest money deposit showing they’re serious about purchasing the property. The home seller typically keeps the funds if they don’t meet the contract obligations. However, if a buyer successfully buys a house, the deposit will apply to their home’s down payment. 

To protect the buyer and seller, an escrow agent will hold the deposit in an escrow account until it’s time to close the home purchase. After the buyer completes the transaction, the money will go toward their down payment.

But it’s worth noting that escrow accounts aren’t just for earnest deposits. Escrow agents also use these accounts to give credit back from the seller and hold any funds that are part of the transaction. Escrow agents will distribute the funds as detailed in the mortgage agreement and real estate contract once the buyer closes on the property. 

Homebuyers sometimes hold their money in escrow even after they complete the home sale. You may wonder why, but consider this: what if you find something wrong with the house before you close the purchase? Holding the money in an escrow account would incentivize the seller to fix the property quickly to earn their money back.

If you’re still wondering, “What is escrow, and how does it work?” don’t worry! You can contact a Realtor in Encinitas to clarify your questions!

What are the Benefits of Using Escrow in Real Estate?

No matter which side you’re on in a real estate transaction, using an escrow account might have some benefits. If you’re a buyer, you may get your earnest money back if a home sale falls through. Additionally, the earnest deposit will apply to your down payment or closing costs of a home.

If you’re the seller in a transaction, you can keep the earnest money if a buyer doesn’t fall through with their agreement. Plus, you can ensure your home won’t change hands before closing when you use escrow for your sale. Of course, setting up an escrow account may require an upfront payment, but you can sleep tight knowing that you will be protected during the transaction. 

Talk to a Realtor About an Escrow

If you have questions about escrows and what to do, you can ask a Realtor for clarification! They could explain the real estate transaction process and tell you what steps to take.

Contact Realtor Linda Moore today if you want to buy or sell a house.

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